UN Office for Disaster Risk Reduction

POLICY BRIEF
FINANCING PREVENTION
AND DE-RISKING INVESTMENT
OVERVIEW
The COVID-19 pandemic has demonstrated that governments
are critically under-prepared to tackle the systemic nature
of risk and are underinvesting in and under-prioritizing KEY POINTS:
prevention and resilience. As the reality of climate impacts
• Sustainability and resilience are two sides
hit, and if the current approach continues, we will continue
of the same coin. To ensure investments are
to face increased losses. sustainable they need to be risk informed.

Total insured losses from natural hazards and human-
induced disasters in 2020 was estimated at $187 billion,
up by 25 percent from 2019.1 Indirect socio-economic costs
of disasters are many times greater. And we have only a scant
understanding of the damage to and losses of ecosystems
as a result of disasters.
Yet, in certain countries, domestic public finances earmarked
for risk prevention as primary objective are on average
less then 1% of national budgets, suggesting a chronic
underinvestment in disaster risk reduction.
To add, capital market investments are not yet accounting
for disaster risk and are in essence, bankrolling future
catastrophes. There is a misperception that disaster risk
prevention is the sole responsibility of the public sector and
not an issue for the private sector. The true costs of disasters
remain external to private sector investment decision-
making; and it remains difficult to include these costs and
benefits in financial modeling and on balance sheets.
Current actions are not commensurate with the sheer scale of
the challenge – the rapid accumulation of disaster risk that is
systemic, interconnected and cascading. Actions to reverse
this trend are needed if governments want to achieve the
outcome and goal of the Sendai Framework for Disaster Risk
Reduction 2015-20302 efficiently and effectively.
1
Swiss Re (2020), Swiss Re Institute estimates USD 83 billion global insured catastrophe losses in 2020, the fifth-costliest on ­record.
2
See Paragraphs 16 and 17 of the Sendai Framework for Disaster Risk Reduction 2015–2030.
• To build lasting ‘Resilience’ – the ability
to cope with shock, to adapt to stress and
ultimately to transform through crisis,
is critical. But it cannot be done without
adequate financing.
• Governments do not prioritize disaster risk
reduction because they see it as a cost for
an event that might never happen, resulting
in devastating impacts when they do occur.
Because it is a matter of ‘when’ and not ‘if’.
• For every $100 spent on total development aid
between 2010-2018, as little as 47 cents were
allocated for disaster risk reduction.
• Global investments of €1.6 trillion in
appropriate disaster risk reduction strategies
could avoid losses of €6.4 trillion.
• It is necessary to promote a ‘Think Resilience’
approach that becomes mandatory in all in all
public, as well as private sector investments.
• In developing sustainable and climate
finance, it is important to integrate disaster
risk reduction to reorient financial flows and
financing in support of disaster risk reduction.

UNDRR Policy Brief No. 2, October 2021

CHALLENGES
Between the period 2005 to 2017, $137 billion was
provided in development assistance related to disasters,
wherein $9.60 out of every $10 was spent on emergency
response, reconstruction, relief, and rehabilitation; while
less than 4%, $5.2 billion, was invested into disaster
prevention, mitigation and preparedness.3
Disaster resilience is not prioritized because it is wrongly
perceived as politically risky – a cost for an event that
might never happen within a political term in most
cases driven by lack of visible and well communicated
incentives. We are stuck in a vicious circle where the
financial cost of disasters is rapidly rising, strapping
governments in their ability to mobilize and provide
necessary funds, trapped in the vicious and self-fulfilling
cycle of disaster-response-recover-repeat. Although there
has been substantial progress in upgrading investment
into ex-ante risk reduction over the last few years, there is
still a serious bias towards reliance on ex-post response,
reconstruction and rehabilitation.
Many governments, businesses and financial
institutions of all shapes and sizes often do not regularly
incorporate considerations related to their exposure and
vulnerabilities to the range of hazards identified by the
Sendai Framework in their financial decision-making. The
data and evidence to incorporate relevant hazard risk
analysis into financial decisions may be limited in certain
geographies and for certain hazards and can be difficult
to access for non-experts.
There is no significant evidence to indicate that investment
decisions are considering disaster risks at the transaction
level, for instance, £2 trillion in assets under management
of UK’s pension schemes are exposed to climate-related
risks.4 Notwithstanding the gravity of large-scale and
long-term systemic threats, investors (both public and
private) may still treat these risks as temporally remote,
limited, uncertain, and/or unquantifiable at the level of an
individual project or asset, and thus externalize them. The
continued reliance on short time horizons as the basis for
financial decisions remains a significant contributor to the
failure of policymakers, investors, corporations, and project
developers to fully consider and respond to disaster risks.
At present, much of the policy, regulation, and accounting
practices do not mandate consideration or disclosure of the
financial impacts of disasters and even though this trend
may be slowly changing, measures are limited primarily to
climate risks. If disaster risk is mispriced or underestimated,
it can have a financial impact on an institution’s income
statement or balance sheet, whether it is a company, a
credit organization or an institutional investor.
We are seeing the consequences of this unfold in real time.
There is a strong need for a new “social contract”
on investing in disaster resilience setting out the
responsibilities and liabilities of national governments,
financing bodies and the private sector to manage the
negative externalities arising from disaster risks.
POLICY RECOMMENDATIONS
Investing in disaster risk reduction is a precondition for
developing sustainably in a rapidly changing climate. It
can be achieved and makes good financial sense. Global
investments of €1.6 trillion in appropriate disaster risk
reduction strategies could avoid losses of €6.4 trillion.5
The policy space is at a crossroads. Faced with an
increasingly tight fiscal space and existential dilemmas
over whether to continue allocating scarce public
resources to immediate relief or to invest in disaster
risk reduction, including in more inclusive sustainable
recovery efforts, political leaders discussing development
finance in the era of COVID-19 have recognized the value
of investing in ex-ante disaster risk reduction to bridge the
short term with the long term, whilst addressing climate
change and ensuring overall sustainability. But this
requires a whole mindset shift to take place across the
financial system, that is a move from short-term outlook
and under-prioritizing disaster risks to promoting
a ‘Think Resilience6’ approach that becomes mandatory
in all public, as well as private sector investments.
Political commitment, public buy-in and support is a
critical enabler of all of the policy options to move forward
this agenda. A basic understanding of and support for
a ‘Think Resilience’ approach will ensure the sustained
implementation of the various policy options, so they are
not perceived as a temporary trend or linked to a particular
party or politician. This requires communications
campaigns to better understand disaster risk and the
importance of investing in prevention.
The following options can help shift investment decisions
and increase financing for risk prevention:
Overhaul regulatory environment and
strengthen oversight
Mainstreaming of disaster risk into public and private
investment: All decisions, whether they are related to
capital investment, social expenditure or environmental
protection, have the potential to either reduce or increase
risks. National governments and regulators need to define
sustainable, disaster resilient investments and encode
risk metrics into broader investments to change investor
behavior and raise awareness of disaster risks. This will
require financial and investment policy and regulatory
reforms, guidance to the market and coordination across
sectors. Disaster risk metrics need to be considered in
the formulation of credit and debt ratings, in indices that
measure the attractiveness of sectors and countries
for investment, and in performance forecasts for both
businesses and countries. Mandatory disclosure of
disaster risks should be part of statutory reporting of
businesses, financial institutions and governments.
3
UNDRR (2019), Global Assessment Report on Disaster Risk Reduction.
ADB (2020), Financing Disaster Risk Reduction in Asia and the Pacific.
4
Financial Times (2021), UK pension schemes face new climate risk
reporting rules.
5
Global Commission on Adaptation (2019), Adapt now: a global call for
leadership on climate resilience.
6
UNDRR (2019), Opportunities to Integrate Disaster Risk Reduction
and Climate Resilience into Sustainable Finance.
 Ensure financial institutions and banks align their strat-
egies, operations and activities with the Sendai Frame-
work: Central banks and financial supervisors, including
auditors, need to integrate sustainability, all potential
hazard impacts including related environmental, tech-
nological and biological hazards and risks, consistent
with the Sendai Framework, into financial stability mon-
itoring and financial supervision. National Governments,
through regulation of central banks and supervisor man-
dates, will need to mainstream disaster risk reduction in
the activities of financial institutions and banks by ensur-
ing that their lending decisions support greater disaster
resilience. Enhanced guidance to integrating disaster
risk into procurement processes, into accounting practic-
es, into international (such as IFRS, IASB) and national
­accounting standards is equally a critical step.
Creating an enabling environment for effective insurance:
Although risk transfer is not a synonym to risk reduction,
the insurance market can potentially play an important role
in reducing risk, but only where the enabling environment
allows for appropriate pricing, coverage and engagement.
Not only can the insurance sector increase the protection
gap; if engaged appropriately, through regulatory changes,
it could also invest in risk prevention and resilience building,
prevent amassing of debt due to disasters and reduce
costs of insurance. Mutual and cooperative insurers can
equally facilitate risk reduction investments. Moreover,
the insurance sector can contribute to understanding the
impacts of disasters in various sectors through disaster
risk assessment as a precondition for premium setting.
Build the evidence base
Track prevention financing: Tracking financing flows in
risk prevention as well as other fiscal data would support
in identifying the volume of investment utilized out of the
budgeted allocation and more importantly how much
of it reaches the intended goal or beneficiary action.
Observatories at national, regional or global level could
help quantify and track investments which, supported
by cost benefit analysis, will allow public and private
sector to measure the real outcomes of investments in
disaster risk reduction. Such observatories could build on
existing methodologies and further improve it by labelling
prevention investments.
Conduct risk-sensitive budget reviews: For holistic
and financially sustainable management of disaster
risk, a portfolio of risk reduction investments needs to
be developed that considers all the phases of the risk
management cycle. National DRR-sensitive budget
reviews can demonstrate the direct and indirect proportion
of DRR allocation and expenditures, in each specific sector.
Combined with robust risk assessments these reviews
could provide evidence on potential losses emanating
from various hazards and identify various sectors in the
short and long term that require increased investment. To
ensure that budget reviews do not remain only an ad hoc
one-time exercise, specific tagging and tracking systems
need to be developed and institutionalized.
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Increase use and application of risk and financial data:
While there have been many efforts to collect and provide
open access to hazard risk, exposure and vulnerability
data, and data on losses caused by disasters associated
with natural and human-induced hazards, its use and
interconnection with financial decision-making could be
significantly expanded. This is especially the case for
ensuring that the financial rationale for risk reduction, e.g.
comprehensive evidence on either the financial, economic,
societal and environmental costs of hazards, or the value
of taking preventative actions, is in a format which is usable
by the investment sector. It would be critical to explore the
application of global earth observation (EO) data, big data
and Artificial Intelligence (AI). Cost benefit analysis based
on risk information would equally assist identifying how
much risk could be prevented or reduced and could be part
of integrated national financing frameworks.
New and innovative financing models
Promote blended financing and introduce prevention
in bonds: Not all resilience projects can be funded by
public resources, which are often constrained by limited
budgets and competing priorities. Moreover, public sector
institutions are not the only ones to gain from an increase
in resilience, and it should be possible for risk prevention
projects to draw on all potential beneficiaries for funding.
Innovative financing models such as blended finance and
impact investing have emerged as one of the tools for
addressing risks and encouraging the private investments
that can transform people’s lives and contribute toward the
Sendai Framework implementation. Another opportunity
is to introduce prevention as a key criterion in climate-
resilience bonds, green bonds, social and sustainability
linked bonds that would help in leveraging finance for
prevention, adaptation and mitigation actions.
Establish a pipeline for disaster and climate resilient
infrastructure investment: Infrastructure is an essential
component of financing for disaster risk reduction.
Investment required in infrastructure and addressing the
resilience of these assets is immense, at the same time
Infrastructure can be a profitable category for investors. To
meet the infrastructure demand and fill the financing gap,
public private partnerships remain a good practice that
needs to be strengthened. Infrastructure investments are
well suited to the portfolios of institutional investors. Co-
benefits, bankability and pipelines of infrastructure projects
supported by strong commitment of national governments
and regulators will drive markets’ interest and foster
stronger partnership between public and private sector.
COVID-19 Stimulus package to build resilience:
Governments worldwide are now spending vast sums of
money on the economic recovery which will significantly
influence our ability to deliver a green, resilient recovery.
COVID-19 and complex disasters have highlighted the need
for more investment in ex-ante resilience and the economic
stimulus packages are an opportunity to address multiple
risks, including climate change impacts. Consequently,
there is a need to enhance a systems and resilience-
focused approach to COVID-19 stimulus and recovery plans
that gives due attention for preventing the next shock. This
requires recognizing the importance of ex ante action and
implementing a ‘prevent first’ and ‘do no harm’ policy.